Spring Cleaning Your Personal Tax Files

The general rule for retaining federal tax records is three years. That's because the statute of limitations for the IRS to audit your tax return is typically three years. The statute of limitations starts on the later of 1) the due date for your tax return, or 2) the date on which you file your taxes.

However, there are many exceptions to this rule of thumb that require you to save financial documents longer. And some states have different records retention requirements. So, it's often prudent to keep most financial records longer than three years.

Federal Tax Records

Most tax advisors recommend that you retain copies of your finished tax returns indefinitely to prove that you actually filed. Even if you don't keep the returns indefinitely, hold onto them for at least six years after they're due or filed, whichever is later.

It's a good idea to keep records that support items shown on your individual tax return until the three-year statute of limitations runs out. Examples of supporting documents include canceled checks and receipts for alimony payments, as well as records showing charitable contributions, mortgage interest payments and retirement plan contributions. You can also file an amended tax return during this time frame if, for example, you missed a deduction, overlooked a credit or misreported income.

Which records can you throw away today? You can generally throw out records for the 2018 tax year, for which you filed a return in 2019.

You're not necessarily safe from an IRS audit after three years, however. There are some exceptions to the three-year rule. For instance, if the IRS has reason to believe your income was understated by 25% or more, the statute of limitations for an audit increases to six years. Or, if there's suspicion of fraud or you don't file a tax return at all, there's no time limit for the IRS to launch an inquiry.

In addition, records that support figures affecting multiple years, such as carryovers of charitable deductions or casualty losses for federal disasters, need to be saved until the deductions no longer have effect, plus seven years, according to IRS instructions.

There are also some cases when taxpayers get more than the usual three years to file an amended return. For example, you have up to seven years to take deductions for bad debts or worthless securities, so don't toss out records that could result in refund claims for those items.

State Tax Records

The previous guidelines are all geared toward complying with federal tax obligations. Ask your SSB tax advisor how long you should keep your records for state tax purposes because some states have different statutes of limitations for auditing tax returns.

Plus, if you've been audited by the IRS, states generally have the right to resolve their own issues related to that tax year within a year of the federal audit's completion. So, hold on to all tax records related to an IRS audit for a year after it's completed.

Bills and Receipts

In general, it's OK to shred most bills—such as phone bills or credit card statements—when your payment clears your bank account or at year end. However, if a bill or receipt supports an item on your tax return, follow the tax guidance above.

If you buy a big-ticket item—such as jewelry, furniture or a computer—keep the bill for as long as you have the item. You never know if you'll need to substantiate an insurance claim in the event of loss or damage.

Real Estate Records

Keep your real estate records for as long as you own the property, plus three years after you dispose of it and report the transaction on your tax return. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims and documents relating to refinancing.

These documents help prove your adjusted basis in the home, which is needed to figure any taxable gain at the time of sale. They can also support calculations for rental property or home office deductions.

Investment Account Statements

To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, dividend reinvestment and investment expenses, such as brokers' fees. It's a good idea to keep these records for as long as you own the investments—plus until the expiration of the statute of limitations for the relevant tax returns.

Likewise, the IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. With Roth IRAs, it's more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you're ever questioned.

If an account is closed, treat IRA records with the same rules that apply to stocks and bonds. Don't dispose of any ownership documentation until the statute of limitations expires.

Find a Safe Place for Essential Personal Records

Your files probably contain more than just tax information. Certain essential documents should be kept indefinitely. Examples include:

• Birth and death certificates,
• Marriage licenses and divorce decrees,
• Social Security cards, and
• Military discharge papers.

These should be kept in a safe location, such as a locked file cabinet or safety deposit box. If stolen, essential documents can be used to steal your identity. In turn, a stolen identity can be used to file for bogus tax refunds or apply for credit under your name.

If you suspect that your identity has been stolen for tax-related reasons, you can submit Form 14039, "Identity Theft Affidavit," with your federal income tax return. You should also check with your state tax agency to see whether there are additional steps to take at the state level. Or you can contact your SSB tax professional to guide you through the remediation process.

Err on the Side of Caution

As you can see, the three-year rule is hardly set in stone. When in doubt, hang on to your records a little longer than you think is necessary. If you have questions about financial record retention, contact your SSB tax advisor.